Asian Investment Opportunities Abound

I spent last week in Asia at the Corporate Access Forum in Singapore sponsored by CLSA Asia-Pacific Markets, which produces some of the most detailed and insightful investment research available.

This was a great opportunity to meet with senior management of many of the leading corporations in Asia. This kind of high-level access is always valuable for investors, but especially so this year as China, India, South Korea and other countries in the region position themselves for recovery and the next growth burst.

Despite this year’s slowdown, U.S. Global Investors continues to believe strongly in the Asia story. Rapid urbanization, an expanding middle class and government policies that promote prosperity are among the factors that we see as driving future growth in that region.

China’s spending to build out its infrastructure has gotten a lot of attention, but that emphasis is a key government initiative in many Asian countries. Construction cranes are a common sight in Singapore, where the government has committed to spending more than $40 billion over the next three years on new roads, public housing and other infrastructure projects.

Caption: Construction of the Marina Bay Sands casino in Singapore

One of the biggest projects now under way in Singapore is the Marina Bay Sands hotel and casino, which I could see from my hotel window. Look at all of the cranes in the image above. This will be the country’s first casino following a change in its gambling laws last year, and its first step toward its goal of becoming the Monte Carlo of Southeast Asia.

This construction, which is valued at more than $3.5 billion, is providing jobs for thousands of workers and consuming many thousands of tons of steel, cement and other commodities. Similar work is under way across Asia, and many more projects are in the pipeline.

The conference in Singapore also featured presentations by CLSA strategists and economists looking at the broader economic outlook for 2009 and 2010. Here are some of the interesting points made in those presentations:

• The total U.S. debt (public and private) was 370 percent of GDP at the end of the fourth quarter of 2008. That’s up roughly 50 percent in the past decade and, of course, this does not take into account the $1 trillion-plus in economic stimulus under President Obama.
• Nominal personal consumption growth in the U.S. is negative and at its lowest in nearly 50 years on a year-over-year basis. This is part of the deflationary trend under way, along with the deleveraging in the financial sector over the past five quarters.
• While emerging Asia (ex-Japan) remains heavily reliant on exports, it is consuming an increasing amount of its own production. In 2001, private consumption in emerging Asia was 25 percent of the U.S. level. In 2008, it was 38 percent. In CLSA’s view, when this consumption level hits 50 percent, you will begin to see an economic decoupling between emerging Asia and the West.
• CLSA’s respected Asia strategist Chris Wood came out with country weightings for the Asia Pacific region compared to the MSCI Asia ex-Japan index. He recommended that investors overweight India, China, Hong Kong and Taiwan and that they strongly underweight Australia (12 percent vs. 26 percent in the MSCI index) due to housing and financial issues.
• CLSA forecasts that China’s economy will grow 7 percent this year and 8 percent next year (9 percent in 2008), and that India will grow 4.6 percent this year and 6.4 percent in 2010 (6.3 percent in 2008). Major shrinkage is predicted elsewhere in the region in 2009: Taiwan -10.8 percent, Singapore -10 percent, Thailand -9 percent, Hong Kong -6.8 percent, South Korea -6.8 percent and Japan -5.5 percent.
• The key macro driver for India is the collapse of oil prices from last year’s highs. This functions like a huge tax break and, along with monetary easing by the Delhi government and underleveraged consumers, bodes well going forward.

The MSCI Asia ex-Japan Index is a free float-adjusted, capitalization-weighted index measuring the performance of all stock markets of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, India and Pakistan.

Comments

[Mad Hedge F...:]

Good plan. Investors which took my New Year advice to load up on emerging markets are now facing the vexing problem of what to do with all of their new found wealth. The emerging market ETF has soared by 57% to $33, and two of my favorites, the China ETF and India ETF’s, have doubled from their bottoms. The average emerging stock market is now up 50% on the year. The good news is that I believe this is just the down payment on a multiyear, tenfold move for many of these markets. The bad news is that all of these markets are way overbought on a short term and technical basis, and that we have to expect pullbacks this summer that could give up as much as half of the recent move. If you are a trader, take the money and run. If you are a long term investor, no pain no gain. I don’t think any of these high growth plays are going to revisit the 2008 lows. Those were once in a century bottoms. This is the only long equity exposure you should have for the next decade.

May 27 12:02 PM

[Tony Daltorio:]

The sun is setting in the West and rising in the East. Invest accordingly.

May 27 01:20 PM

[Milt Woodward:]

Frank, good article but I have one quandry. Are you recommending the EPP index (Asia ex-Japan)? This index's major holdings seem to be heavily weighted toward Australia – appears to be counter to your thesis.

May 27 01:46 PM

[Alan Young:]

EPP is wrong; the best fit would be AAXJ

May 27 05:27 PM

[fran:]

allen and milt. would not mr holmes think his funds to be superior to these ETFs. i feel quite certain he discusses trends, not the listed ETFs[most likely arbitrary choices of SA editors]. holmes is not in the ETF business.


On May 27 05:27 PM Alan Young wrote:

> EPP is wrong; the best fit would be AAXJ

May 27 10:09 PM

[Mad Hedge F...:]

There is another market to focus on. With North Korea testing low grade nukes and short range missiles (think WWII German V2’s), and a former prime minister jumping off a cliff to commit suicide, you wouldn’t think this is the best time to contemplate an investment in South Korea. You may recall that I recommended that the Hermit Kingdom be added to spell “BRICK” with a “K” last January (www.madhedgefundtrader...) .
Korea is in fact somewhere in between a true emerging market and a developed country, with lower risk and lower returns, than say a Taiwan or an India. Let’s see how that call faired. After hitting a low of 998 in March, it soared 45% to a seven month high. The recent troubles have pared it back by 10%. For long term investors, this is opening a rare window to scale into some exposure here. Short term traders should wait for a bigger pull back. They used to say you bought Asia only when there was blood in the streets. This isn’t really blood, but is close enough.

May 28 12:11 AM

[Larry House:]

It is obvious investors must go outside the US for growth prospects. Asia makes a lot of sense. I like South Korea, which has been mentioned, and I have been overwieght China for three months. I am cautious on all equities now since we have had the sharp bounce, but I am more positive on Asia than anywhere else.

May 29 11:30 AM

[punk_ash:]

Asian markets have become Ponzi scheme once again. Most sane investors know that these markets are getting overvalued again, but they also know that there is a good chance that they can buy now and be able to sell to the next guy at a higher price with no regard to inherent value in the asset.

Believe it or not, the hedge funds will not be the ones that will be left holding the bag.

May 30 12:42 AM

[punk_ash:]

Asian markets are up based on speculative money from the west that is leaving dollar. Indian Joe 6 Pack has been turned off the stock market for now, they will return to buy at the next top. When this speculative money gets called one more time, who is to tell that we will not break the March 09 lows.

I think we will break 2009 lows this summer.


On May 27 12:02 PM Mad Hedge Fund Trader wrote:

> Good plan. Investors which took my New Year advice to load up on
> emerging markets are now facing the vexing problem of what to do
> with all of their new found wealth. The emerging market ETF has soared
> by 57% to $33, and two of my favorites, the China ETF and India ETF’s,
> have doubled from their bottoms. The average emerging stock market
> is now up 50% on the year. The good news is that I believe this is
> just the down payment on a multiyear, tenfold move for many of these
> markets. The bad news is that all of these markets are way overbought
> on a short term and technical basis, and that we have to expect pullbacks
> this summer that could give up as much as half of the recent move.
> If you are a trader, take the money and run. If you are a long term
> investor, no pain no gain. I don’t think any of these high growth
> plays are going to revisit the 2008 lows. Those were once in a century
> bottoms. This is the only long equity exposure you should have for
> the next decade.

May 30 12:49 AM